Development of the Global Economy 1945-2000

1. 1Collapse of the Bretton Woods System (USA).
2. 2Oil Crises of the 1970s.
3. 3Protectionism (USA).
4. 4Debt Crisis 1982.

Function:

• Commonly referred to as the international monetary regime; prevailed from the end of WW2 to the 1970s.
• History's first fully negotiated international monetary order, intended to govern currency relations among states.
• Fixed exchange rates: stabilised rates and facilitated international monetary transactions. The USD was anchored to gold; all other currencies were pegged to the USD. This was only possible because the US had large gold reserves and purchasing power.
• Under this system the global economy recovered quickly from WW2.

Impact on the global economy (1945-1971):

• Encouraged trust in currency relations and promoted international financial stability.
• Increased international trade, facilitating global growth and recovery.
• Trade volume among developed countries rose, with a trickle-down effect for developing nations.
• Developing nations shifted away from dependence on primary product exports towards labour-intensive manufactures such as textiles.

Failure: the system collapsed in 1971. It was not based on market principles; it had liberal attributes and did not provide social welfare or domestic stability.

• Established at the Bretton Woods Conference to maintain exchange rate stability.
• Function: monitor exchange rates and provide funds as a last resort, helping countries correct balance-of-payments deficits.
• Financed by member states through payments of gold and national currencies. Contribution determines voting power and influence over policy.
• Evolved into a general provider of credit to governments in financial difficulty. When Mexico faced the 1982 debt crisis, the IMF provided US$3.4 billion in credits.

Impact of Bretton Woods on the IMF:

• Provided balance-of-payments support to wealthy European nations facing the dollar-gap problem (non-US nations needed US goods but could not obtain the dollars to buy them).
• Provided technical assistance: training courses on balance-of-payments statistics and international economics; advice on money and capital markets.

Limitations:

• The post-war global economy was unstable. Lenders were reluctant to fund large projects, although these were vital for private investment.
• Developing nations constantly needed credit and were less able to repay than the industrialised countries the IMF was designed for. Their loans ran far beyond the standard five-year term. Borrowers were inspected to ensure funds were used as intended.
• Pushing capital market liberalisation brought hot money inflows, causing demand-pull inflation and making nations more vulnerable to financial shocks.
• The one-size-fits-all Structural Adjustment Programme (SAP) assumed countries were living beyond their means and cut government spending on education and healthcare, hurting the poorest most. Example: Mexico suffered a severe financial crisis in 1994 despite a decade of liberalisation and restructuring after its first debt crisis, and still owed over US$55 billion.

• Purpose: long-term loans for rebuilding projects, especially after WW2, supporting countries ruined by the war.
• Funded by member nations' subscribed shares; contribution determines voting power, as with the IMF.

Impact of Bretton Woods on the IBRD:

• Shifted from war recovery to development loans, as private foreign investment flowed to renewed Western Europe.
• 1960s-1980s: focus on poverty alleviation and meeting basic needs (Basic Needs Approach).
• The International Development Association (IDA), a subsection of the IBRD, provided cheap long-term loans to Third World countries, helping them expand production and export more raw materials to buy imports.
• US perspective: cheap raw materials fuelled US industrialisation; US goods sold to developing nations for profit; the surplus helped fund European recovery, which in turn bought more raw materials from the Third World.

Limitation: recipients made little progress. Of 66 developing countries receiving IBRD funding for 25 years, 37 were no better off than when they began.

• Played a significant role in global market liberalisation: freeing the flow of goods, services and resources across barriers such as national boundaries, tariffs, transport and distance. This cut the cost of doing business.
• Post-war liberalisation focused on factors of production.
• Key principle: unconditional most-favoured-nation (MFN) treatment. A tariff cut offered to one country had to be extended automatically to all, speeding trade liberalisation.

Impact: successful against barriers to manufactured goods. The Geneva Conference (1947) negotiated significant tariff reductions on about 45,000 products, roughly half of world trade at that time.

Financial aid: helped boost Japan, Taiwan and Europe.

• Marshall Plan (Western Europe) - revived Western Europe's war-torn economy; helped more than any other single factor. The IMF and IBRD lacked the funds for a scale comparable to the US. US income was about 35 percent of world income in the late 1940s.
• Objective: temporary aid for food, fuel and raw materials to countries unable to pay for resources due to the dollar shortage; an opportunity for European reconstruction.
• Also served US interests: European recovery was essential to US welfare; it consolidated the West against the Soviet Union and diminished the communist bloc in Western Europe.
• Funding examples: Britain US$3,176 million; France US$2,706 million.
• By the end of the plan all supported nations exceeded pre-war output; output in 1951 was 35 percent above 1938.
• It stimulated the US economy by creating a market for American goods.
• Other aid: Japan received US$2.2 billion in reconstruction aid. The US financed nearly 40 percent of Taiwan's gross domestic capital formation and 30 percent of its essential imports.

US technology:

• Post-war technological progress was rapid, stimulated by wartime R&D. US R&D spending rose from 1 percent of GDP to 2.8 percent from 1950 to 1960.
• Innovation created new raw materials and production processes, stimulating global demand for new goods.
• Point 4 Programme (1949): transferred US scientific knowledge to less developed countries to improve agriculture and development. Implemented in Iran, Pakistan, Israel and Jordan.

Demand for the world's goods:

• The US kept its market relatively open; for a long period after WW2 it consumed most of the world's exported goods, stimulating recovery.
• European exports to the US rose from US$4.3 billion to US$11.4 billion (between 1955 and 1970), showing European dependence on the US.
• Japan: after its goods were denied access to China and the Southeast Asian market was too small, President Kennedy lowered trade barriers for Japan. Japanese automobiles entered the US market. US purchases of Japanese goods were linked to a 150 percent rise in Japan's GDP from 1960 to 1970.
• In the 1970s the US restricted some imports, such as steel and automobiles, to remain a major market for world goods.

Military purchases:

• US procurement of military equipment from allies further stimulated their growth. The Cold War required US arms orders that rebuilt the economies of Britain, France and West Germany.
• Korean War: the US procured arms from Japan; Japanese exports included 27 percent of its export trade in that category; the US ordered Japanese trucks worth US$13 million.
• Vietnam War: brought an estimated US$1 billion a year to Japanese firms.

Role in international agreements and organisations:

• The US dollar was the main currency of the pegging system; the US bankrolled the IMF and IBRD, providing the largest share of funding: 31 percent of the IMF and 27 percent of the IBRD. Voting power follows contributions, giving the US dominance.
• GATT: with the Cold War, trade liberalisation was important to the US, which wanted global prosperity to counter communism, since communism appeals to nations doing poorly economically. The US was the main actor in creating GATT.
• European integration: the US used Marshall Plan leverage to encourage intra-European trade, the multilateral payments framework, and the OECD. The OECD provided economic information and advice and a platform to compare policies.

Security assistance:

• Motivated by containing communism. US security let allies focus on economic development and gave business confidence. NATO provided protection. The US-Japan Security Treaty (1951) allowed US forces in and around Japan. These arrangements let Japan keep military spending at 1 percent of GDP and West Germany at 2.5 percent of GDP.

American multinationals:

• American MNCs dominated the rise of post-war MNCs, driven by competition and low-cost operating sites. More than half of Coca-Cola was sold outside the US.
• MNC expansion brought foreign direct investment (FDI) to developing nations. By 1973 half the world's FDI came from the US, mostly to technology and capital-intensive industries. US business investment rose from US$32 billion to US$1.7 trillion by 1987.
• Limitation: FDI benefits were uneven; most went to a small number of lower and upper-middle income developing nations.
• Limitations of MNCs: FDI worsened developing countries' balance of payments; MNCs abused concentrated markets without fear of local competitors; MNC entry threatened local brands and eroded their market share.

• Western European post-war reconstruction (1950s-1973): rapid growth propelled global growth; GDP grew at an average of 4.8 percent a year.

Reasons for the post-war European economic miracle:

• Marshall Plan: the IMF and IBRD lacked sufficient funds; the US held about 35 percent of world income in the late 1940s. Aid addressed the dollar shortage and was designed to curb communism, since communism thrives where growth is weak.
• US demand for European goods: European exports to the US rose from US$4.3 billion to US$11.4 billion between 1955 and 1970, showing heavy dependence. The Volkswagen Beetle fuelled Germany's economic miracle. US grants and arms orders to British, French and West German industries injected funds.
• BWS institutions' aid: in the first five years the World Bank and IMF loaned large sums (IMF and World Bank about US$2 billion; World Bank about US$1.75 billion). However, the system could not cope: funds were insufficient, and the World Bank relied on US financial markets to float its bonds.
• Technological progress: wartime R&D stimulated new goods such as the transistor and microchip, boosting demand.

Regional institutions and trade liberalisation:

• European Economic Community (EEC), 1958: France, West Germany, Italy, Belgium, Netherlands and Luxembourg; later became the EU. Tariffs among members were eliminated in 1969. Western Europe's share of trade staying within the region rose from 56 to 66 percent. It also increased intra- and extra-European FDI.
• Intra-European trade grew at an average annual rate of 15 percent from 1959 to 1971, faster than the rest of the world, partly from the diffusion of technological progress.
• However, growing trade among Western European countries did not benefit developing countries as much; the developing world's share of total world exports fell from 31.6 percent to 21.4 percent by 1960 (note: source text was cut off here; do not invent the rest).